Tuesday, August 13, 2013

The need
to allocate more spectrum for mobile broadband has achieved rare, near
unanimity in Washington. As the FCC implements the 600 MHz band incentive auction,
however, there is a lot of chatter concerning limiting eligibility to bid on
the voluntarily contributed broadcast spectrum. Achieving a “yes” on the
incentive auction bargain must include rejecting such limitations because they
are antithetical to the reverse auction bargain and violate free market principles.

Incentive
auction legislation
encourages broadcasters to voluntarily contribute spectrum in exchange for a
portion of the auction revenues from the “forward auction” portion of the
process. The FCC’s implementing NPRM
recognizes this goal as critical to net as much as 125 MHz spectrum. Although
the FCC never proposed a spectrum cap for bidders, it does ask whether some
limitation should be imposed on the overall amount of 600 MHz spectrum that can
be acquired by a particular bidder in the forward auction.

Smaller
mobile players have been promoting bidding limitations to gain more spectrum
for themselves. For instance, T-Mobile has proposed that
the FCC set a “target price” on the overall receipts in the forward auction,
accompanied by strict spectrum caps for large mobile providers. This is dubbed by
its proponents the “Dynamic Market Rule.” In support of limitations, Sprint has argued
that, based on spectrum auctions in Europe, restricting bidders may have no
impact on eventual auction prices, but its paper is riddled with caveats.

Placing limitations
on bidder participation is unwise. First, it almost certainly will tend to
depress expected revenues, a consequence that harms taxpayers at a time of
significant budget deficits. A recent study has
shown that restricting potential bidders in auctions around the world
probably did reduce potential receipts. The failure to achieve the reserve
price in the 700 MHz D Block auction,
which most
probably occurred because that block was subject to a significant condition
on use, should be a lesson for conducting any auction.

Second, perception
that revenues will be depressed will in turn deter broadcaster willingness to volunteer
spectrum, undermining the principal aim of the reverse auction to repurpose, in
the FCC’s words, a “maximum amount of spectrum.”

Third, bidder
limitations will skew the competitive market by granting advantages to
individual market participants. Availability of insufficient mobile spectrum will
harm consumers by inevitably reducing service quality and driving up broadband prices.
And even though the FCC has provided some bidding credits in other auctions for
small designated entities, a practice itself that raises serious issues, the
agency has never adopted bidding advantages for multi-billion dollar entities
with significant, highly capitalized foreign ownership.

Fourth,
there is no showing that promoting competition requires handicapping certain bidders
in the forward auction. Although the Justice Department speculated that
a dominant firm might want to foreclose competitors from acquiring more
spectrum, it makes no specific recommendations to the FCC to limit forward auction
participation. Larger mobile carriers argue that limiting
bidders is unnecessary because the chance of a foreclosure strategy is remote. In
the end, concerns about undue market concentration should be left for
adjudication by the antitrust authorities in other forums. And it should not be
forgotten that the promotion of wireless broadband will strengthen competition in
the overall multi-platform broadband marketplace. It is a mistake for the FCC
to continue to look at wireless broadband as if it is a standalone segment
separate from the broader marketplace.

Fifth,
auction handicapping proposals are seriously flawed. Although the “Dynamic
Market Rule” proposal is advertised as a mechanism to prove that limiting
participation in an auction does not affect bid prices, its design proves that it
is intended to steer spectrum to a smaller bidder, hardly a “dynamic” result.
And there is no discussion as to how the FCC will decide what the “right”
target price would be, i.e., what unrestricted bidding would produce as the
maximum price. It would be exceedingly difficult, if not impossible, to
identify the “right” target price before the auction. And the fact that failure
to meet the target price would cause the rules to be adjusted to permit larger
mobile bidders to win small blocks of spectrum until the target price is
reached not only concedes the design failure, but compounds the problem by
granting the spectrum to the favored bidder anyway. As Mike Myers’ Linda
Richman would say on Coffee Talk, "the Dynamic Market Rule is neither
dynamic, nor is it a market, discuss amongst yourselves."

The
Commission should not risk meeting the near unanimous desire to repurpose a “maximum
amount of spectrum” for mobile broadband use by tilting the auction scales
toward particular bidders. Getting to “yes” on the incentive auction bargain
depends on more robust participation by all willing bidders.